Abu Dhabi, UAEMonday 20 May 2019

Currency wars are the fallout of tense international relations

Summer traditionally meant a lull in the stock markets – but the current flashpoints between global powers are triggering a currency crisis, writes Damien McElroy

Berat Al Bayrak, Turkey's Treasury and Finance Minister. Mucahid Yapici / AP
Berat Al Bayrak, Turkey's Treasury and Finance Minister. Mucahid Yapici / AP

In a previous world, the old trading adage was "sell in May and go away". Stock market investors would run down portfolios and go on holiday, confident that the strongest stock market growth was from November to April and their interests would be spared any fluctuations in the summer months.

It was a truism that held beyond the immediate circumstances of the markets as western governments shuttered and news rooms entered the so-called silly season of not much heavy news.

But not this summer. Look at the currency markets and it would be a challenge to describe it as a quiet summer in the northern hemisphere.

The run on the Turkish lira, Iran’s rial, Russia’s rouble and the British pound is making for a very torrid few weeks. The cause of the turmoil is politics and there are common themes. The downward spiral is exposing fault lines that politics tries and fails to finesse.

Currency wars are today the least appreciated element of international relations.

Russian President Vladimir Putin is strong at home, buoyed by high oil prices and a good World Cup. However, his country is in a weak place on the international stage. There’s not much to like about his handling of the economy.

Turkish President Recep Tayyip Erdogan survived a coup and won the recent election yet Turkey is similarly not in a good place globally and there is not much left of the Anatolian Tigers economy.

British Prime Minister Theresa May, meanwhile, has been dealt the calamity of Brexit. The hardcore within the Conservative Party are determined to wreck any kind of deal that ensures a smooth approach to the exit. The fate of the pound is tied to the wrangling.

And Iranian President Hassan Rouhani is under pressure from both within and without. The decision to divert all the revenues unleashed by the 2015 nuclear deal to regional adventurism has been disastrous. It led to a revolt by the hard-pressed population. Had more of the new money from the agreement been used to meet the aspirations of Iranians, Tehran might not be in the fix it currently finds itself in.

The backdrop is, of course, the US dollar’s Trump paradox. Even while the US president is establishing tariffs on trade and upsetting global economic relations, the dollar is in an upward spiral. The US is in effect being rewarded and having its disruptive behaviour reinforced.

Which means the dollar has become a powerful stick that is being used by Washington to attack undeserving allies and free-loading rivals.

How to ease the pressure? Get the message. A simple adjustment that is sadly not on offer.

Mr Erdogan and his minions have resorted to defiance and communicate in mumbo-jumbo. In full crisis mode, Berat Al Bayrak, the treasury minister and Mr Erdogan’s son-in-law, announced a new economic model on Friday. This would ensure inflation and growth are “not enemies” and feature “strategic” decision-making of a type not seen before, he said.

What that means is anybody’s guess. The markets have given up on such guessing games.

It is an irony that when Turkey had highly unstable politics in the last quarter of the 20th century, its society was more or less cohesive. It was not an easy period for Turks but the groundwork was laid for a decade-long boom at the start of this century.

The majority government led by Mr Erdogan blew that legacy by sowing divisions at every turn.

An increasingly risky foreign policy was a costly error as the region grew more unstable. The reverberations are now playing out.

We have now reached a point where Mr Erdogan heads a Nato nation that is considerably closer to Russia than it is to America.

Its stance makes no sense because the nations are on opposite sides in Syria, a country that presents each with their single biggest foreign policy challenge.

The entente is only feasible because Mr Erdogan, like Mr Putin, is manically obsessed with challenging America’s authority.

To do so, they de-prioritise the economy and accentuate friction with the global economy.

If either thought having a president in the White House operating from a similar playbook would be a boon, they are being sadly disabused.

A lot has come together in the past few weeks. Share markets are still going up because, by and large, companies remain well-positioned, despite the macro-economic warnings of chaos and strife.

What the currency traders are doing is voting with their feet on the flashpoint states most vulnerable to losing out in the current turmoil.

Politicians cannot make gambits in isolation. Investors have the tools to pull their money and will not give a blank cheque to leaders bent on egotistical lurches.

The currency crisis is the defining event of the summer. The news cycle is like a river in spate. Respite is a long way off.

Updated: August 11, 2018 03:15 PM